Property Taxes 101

Understanding how property taxes work is fairly straightforward. There are four simplified steps the county goes through to arrive at the amount it bills you for. First, the assessor’s office determines the value of all the properties in the county. It does this by appraisals, sold records, computer modeling, building permits, etc.; the assessor then adds up all the real estate values in the county to get a grand total. Second, if your county uses the full value approach, the assessor simply totals up the appraised values. But, if the county uses an assessment ratio, say one-half, for example, then you multiply the total value of all taxable properties by .50.
Third, the county comes up with a tax rate. This is simply the budget or the money the county needs for the coming year divided by total value of all the real estate in the county. Suppose the tax rate is .0076 and your house is assessed at $200,000. Multiplying $200,000 by .0076 equals $1,520 that you owe the tax collector.
In the final step, the county clerk mails out tax notices to the owners of all of the properties in the county. If you think your taxes are too high, there are two variables you can work with to lower them. One, you can go to the county or city budget hearings and challenge how the government spends the money. If enough people get upset, a referendum can put a tax cap on the ballot, as happened in California, Texas, and other states.
The other way is make sure your home’s assessment is as low as possible. If the tax notice shows a value you think is to high, you can appeal it.

Tax Escrow Account

When you’re sitting at the closing table going over the closing statement (HUDs), whoever is doing the closing will point out a line labeled county taxes (usually line 211). It will have two dates; the first date will be January first and the second the day you’re closing. There will also be a dollar amount, and that’s the property taxes on the home you’re buying for that year. Since you’re closing somewhere between January 1 and December 31, the property taxes will need to be prorated. Incidentally, property taxes are typically due by November 30, but the tax year is calculated from January 1 to December 31. Back to the closing and line 211. For example, suppose you’re closing on March 27 and the property taxes for the year are $1,364. From January 1 to March 27 are 86 days the sellers have owned the property, and they owe the taxes for those days. So dividing $1,364 by a 365-day year equals $3.74 a day times the 86 days, which yields $321.38; that is the sellers’ portion of the property tax. Since the taxes won’t be due until November when you or the bank escrow pays the full $1,364, the people doing the HUD statements give you a credit for the sellers’ portion or $321.38.
But there’s still more if you’re going to be paying your taxes through an escrow. To get the escrow set up, the lender will usually charge you three to five months of tax payments on line 1004. In the example above, the monthly tax payment is $1,364 divided by 12 months or $113.67.
If the lender requires five months in the escrow at closing, you’ll be charged five times $113.67 or $568.35 on line 1004. Then each month you’ll pay $113.67 or whatever it takes, so you’ll have enough in the escrow by November.

Property Taxes and Your Monthly Payment

When you buy a home, your mortgage lender will usually require an escrow for taxes and insurance if you have less than a 20 percent down payment. For lower loan-to-value loans, many lenders give you the option of paying property taxes on your own.

When tax payments become part of the house payment, the tendency is to mail a check the first of the month and forget about it. As result, it becomes an out-of-sight-out-of-mind situation. But, if you pay property taxes on your own, you develop a slightly different perspective. You feel the pain of writing a sizable check on or before November

30 every year, and when the assessment goes up, the motivation is strong to challenge it. And you should; according to the International Association of Assessing Officers (IAAO), more than half of the homeowners who protest their assessments get a reduction.

The Capital Gains Factor of Home Selling

When you sell your home, you don’t have to pay capital gains tax on the first $250,000 for a single homeowner and $500,000 for a married couple. But if you rent out the full basement, you may be able to claim only one-half the deduction because the other half is a commercial property.
However, you can get around this problem by converting the apartment back into a single-family home before you sell. To qualify for the full exemption, owners must occupy 100 percent of the house for two of the five years before the sale. However, this doesn’t necessarily apply to an apartment that a family member lives in. In other words, if you have an apartment and are intending to sell, you’ll need to look ahead and do some planning.
Before you rent out your home, check with a tax professional to make sure it’s in your best interests.